Caterpillar sets another sales and profits record

Paul Gordon

Saturday

Jan 26, 2008 at 12:01 AMJan 26, 2008 at 4:47 PM

Despite a slowing U.S. economy and concerns of a recession, Caterpillar Inc. maintained a positive outlook for 2008 after setting a record for sales and profits in 2007. The record was fueld by strong sales abroad.

It used to be if Caterpillar Inc. was down on the U.S. economy, its outlook for future business was gloomy as well.

How times have changed.

Caterpillar’s global strength not only enabled it to reach another record for sales and profits in 2007, but the company maintained a positive outlook for 2008, saying it expects this year to be record-setting, as well, even though it believes the United States may go into a recession.

"It’s a very positive story, this globalization, and sometimes it gets too much of a negative spin," Caterpillar Chairman Jim Owens said Friday during an interview with CNBC from Davos, Switzerland, where he is attending the 2008 World Economic Forum annual meeting.

Indeed, strong sales abroad — increases well into double digits in most regions — more than offset slumps in machinery and engine sales in North America, bringing record profits in the fourth quarter and for the year, Caterpillar reported Friday.

Caterpillar had sales and revenues of $44.96 billion — an increase of 8 percent — in 2007, bringing a profit of $3.54 billion, or $5.37 a share, an increase of 4 percent over 2006.

In the fourth quarter 2007, record sales and revenues of $12.14 billion were 10 percent higher than in the fourth quarter of 2006. Profit was $975 million, or $1.50 a share, compared with $882 million, or $1.32 a share, during the fourth quarter of 2006.

Caterpillar met or narrowly beat the expectations of Wall Street analysts, who expected a fourth quarter profit of $1.50 a share and a year-end profit of $5.36 a share.

That along with Caterpillar’s continued positive outlook was well-received by investors. Company stocks rose 68 cents a share on Friday — when the rest of the Dow Jones industrial average lost 171 points — and closed at $65.93 a share.

Caterpillar said its expects its sales and revenues to increase 5 percent to 10 percent in 2008 and for profit to increase 5 percent to 15 percent. That, despite the company’s prediction that growth in the United States will remain weak, "with recession a real threat."

In a prepared statement, Owens said, "It’s gratifying to be able to maintain an outlook for 2008 that reflects continued growth and all-time records for sales and revenues and profit at a time when we’re expecting recessionary conditions to persist in key markets we serve in the United States. We’re starting 2008 with a very strong order backlog, particularly for larger products like industrial gas turbines, large reciprocating engines and mining trucks. While we expect anemic growth in the U.S. economy, we continue to see positive conditions for our sales in most of the rest of the world."

The company said it will increase capital expenditures to $2.3 billion, from $1.7 billion in 2007 to improve operations in plants worldwide and will continue implementing Caterpillar Production System procedures, which will improve operating efficiencies.

Operating costs increased again in the fourth quarter and all of 2007 because of inefficiencies, brought on mostly by the company having trouble keeping up with heavy demand and resulting supply bottlenecks. That kept profit lower than it otherwise would have been.

Analysts again questioned company officials hard about operating costs, but a couple said investors seem to be getting more patient as the company works to improve efficiencies.

"They aren’t out of the woods yet, but the manufacturing costs are coming down. The improvement has been gradual and is a little frustrating, but I think people are prepared to be patient," said Mark Koznarek of Cleveland Research.

Koznarek and John Kearney of Morningstar said while Caterpillar’s results weren’t surprising, they expected the company’s 2008 outlook to be less positive.

"Especially given how negative the company is on the U.S. economy, this outlook is surprising," Kearney said.

Koznarek noted the 2008 outlook is similar to the preliminary outlook the company issued in October. Considering how the U.S. economy has softened since then, he said he and other analysts expected Caterpillar to altar its outlook downward. "That they did not is definitely a positive," he said.

Dave Burritt, president and chief financial officer, acknowledged some will think the 2008 outlook is more optimistic than expected but he said the company’s approach to putting together its outlook hasn’t changed. "We look at all the different variables that impact our business and settle on what the outlook’s going to be," he said.

Mike DeWalt, director of investor services, said analysts may have forgotten that when Caterpillar made that preliminary outlook in October, the company was "far more pessimistic" about the U.S. economy than most others at that time.

"I think it’s more of a case where the rest of the people have caught up to what we were thinking," he said.

Indeed, Caterpillar expects North America to be its weakest region for growth in 2008, with strength in Canada partially offsetting weakness in the United States. The emerging markets in the Asia Pacific and Latin America regions are expected to again experience double-digit growth, the company said.

Highlights from Caterpillar’s earnings report include:

- Machinery sales were down 7 percent in North American, but up in all other regions — including 40 percent in Asia Pacific — to bring total machinery sales up 13 percent.

- Engine sales were off 23 percent in North America and 8 percent in Latin America, but had double-digit gains in Asia Pacific and Europe, leading to an overall gain of 5 percent.

- Caterpillar Financial Products, the company’s wholly owned financing subsidiary, had record revenues of $2.99 billion and a record profit of $494 million in 2007.